Limiting Size of Outsourcing Deals Is No Solution

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12 Trends Shaping the Outsourcing Market

Rather than just seeking the lowest prices, buyers are relying on more sophisticated techniques.

Some of the most spectacular outsourcing failures in recent months have involved large and lengthy contracts, like the state of Indiana's canceled 10-year, $1.3 billion deal with IBM, which is now being contested in an Indianapolis courthouse. But it's important to remember that while the size of such deals may exacerbate problems such as a lack of communication, it doesn't cause them.

 

As I wrote in a post aboutbreaking up large outsourcing projects into more manageable chunks, that'd be like saying a freezer full of Ben & Jerry's causes weight gain. The Ben & Jerry's might make it easier for those with no self-control to polish off a few pints every night after dinner, adding 10 pounds in no time. But use a smaller spoon and/or indulge less frequently, and it's possible to maintain your weight and still enjoy a treat.

 

In that post, I shared some suggestions from Danny Jones, a partner at sourcing adviser TPI, who like me believes the size and structure of an outsourcing deal is dictated by the nature of the outsourced work, the goals of the project and a company's ability to evaluate, procure and manage outsourced services, among other factors.

 


Sometimes, in the case of large-scale business transformation, an extended contract with a single outsourcer is the most logical option. But when you sign such a deal, it makes sense to structure the relationship like a smaller, shorter one, with a series of smaller "contracts" within the large one. This is one of Jones' key bits of advice, and it makes a lot of sense. Jones also pointed out that simply shrinking outsourcing deals won't make underlying management problems miraculously go away.

 

With that in mind, it's hard not to see the UK government's response to mega outsourcing deals signed by a previous administration as a knee-jerk reaction. As Computing reports, all outsourcing contracts signed by the Labour government after Jan. 1, 2010, will be reviewed by Conservative officials, with some possibly being reduced or canceled.

 

There's nothing wrong with looking for contractual red herrings and trying to renegotiate outsourcing deals to get more value for the money. In fact, lots of companies reworked existing outsourcing contracts in the past quarter, according to TPI.

 

But this Economic Times story quotes an Ovum analyst as saying UK officials want to cap all future IT outsourcing deals at 100 million (U.S. $144 million). Sources quoted in both Computing and the Economic Times indicate it could be costly for the government to restructure or cancel deals, depending on the language of the contracts. That's a legitimate concern. But I think an even bigger one is the government's focus on size instead of quality. If you take away the Ben & Jerry's, some people will just eat whatever else they can find in the freezer.



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Jun 13, 2010 11:42 AM BPO Manila BPO Manila  says:

Great post. I must say, I've never thought of breaking up outsourcing projects before, but the way you explained it makes a lot of sense. I think that smaller, shorter outsourcing contracts can definitely be more profitable as it lessens misunderstanding, and it provides you with an easier chance of getting out with hardly any damage in case a deal goes bad. Very well expounded, and it made me hungry for ice cream (haha!)! Thanks!

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Sep 18, 2010 7:42 AM Telemarketing Telemarketing  says:

Very informative post. It is true that outsourcing has many advantages but it is also important to consider that you do not have to put your eggs in one basket. The idea of breaking up the projects to different providers is a great way to gain skilled and professional providers to address what you need rather than focusing on one huge provider.

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